The Calm Before the Inflationary Storm

September 2009

by Tim McMahon, editor

I must be getting old.  Things seem to change awfully quickly.  It seems like just yesterday that gasoline was  well over $4.00 a gallon and inflation was 5.6%.   It was July 2008 and inflation was the hot topic, everyone was worried about costs climbing exponentially.  It seemed like every time I went to the store things cost more.  Oil was a speculator’s dream and a car owner’s nightmare. 

And then came the crash.  Oil prices came crashing down along with the stock market and the banks.  The big news was deflation. The media was beating the drum about how bad deflation was and how this was the first deflationary period since 1950.  Funny,  I didn’t hear anyone at the gas station or the grocery store complaining about falling prices. 

What’s so bad about deflation anyway?  Why were they worried?  Well, first of all, there are two types of deflation.  The first is price deflation and that is when prices at the pump and at the store are lower than they were previously.  And of course no one minds that (except bankers and I’ll explain that in a minute).  The other is asset deflation and that is when your brokerage account and house price goes down.  Now that’s another story…

This brings us to bankers.  You would think a banker wouldn’t like inflation; he loans out money and gets back payments that are worth less and less.  But in fact, the price we pay for a loan takes that into account i.e. the banker builds a cushion into the interest rates to cover the expected inflation.  So what bothers a banker is rapidly increasing inflation that he hasn’t built into his profit margin.

On the other hand, a little inflation is good for a banker’s business.  It creates easy money and a mindset among the people that they are getting something for nothing from the bankers by paying with less valuable dollars. So they are more likely to take out loans and “spend the money before it depreciates and buys less”.

On the other hand, you would think banks would like deflation because they loan out money and get paid back with increasingly valuable dollars.  But once again, the bankers disagree.  When money is scarce and getting more valuable several factors conspire against banks. The first is that people are less likely to borrow when they can defer purchases and things will be cheaper in a month or two (or twelve).  

Second, people defer purchases because they fear the economy is getting worse and they may not have a job next month or their hours have been cut. And finally, the banks themselves fear the same exact forces so they increase their lending requirements and basically will only loan money to people who don’t need it (or want it).

This brings us to why the news media fears deflation so much.  It isn’t because they fear falling prices, or that it will hurt the common man, it is because it is bad for banks, i.e. they can’t loan money.  So the media has to stir up fear of deflation in the minds of people so the government can crank up the printing presses and bail out the banks. 

Once the printing presses and the bailouts get going, massive sums of money can be transferred to the bankers so they can get their $11 Billion dollar bonuses again.  And once again all is right with the world.  Or is it?  Where are all these Billions coming from?  Not taxes… it must be magic,  the money is created out of thin air, with the stroke of a pen the money is there. 

Unfortunately, magic has a price. As these magic dollars are spent the supply of money grows and as the total supply of dollars grows, each individual dollar becomes worth less and less.  The first recipients think it is an ordinary dollar and accept it at face value, but over time, people begin to realize that these aren’t ordinary dollars, they are magic dollars… so they become worth less and less, until they are totally worthless.  If we look at our inflation calculator

we see that from August 1979 until August 2009, a mere 30 years, prices have increased 192.46% so if we go to the “How much would it cost calculator”  we enter $1 as the original cost and 192.4% inflation and we find that it would now cost $2.92 … almost 3 times what it cost in 1979!  So your savings would have to triple just for you to be able to buy the same things.

That is why inflation is often called the stealth tax.  It secretly steals your savings and transfers your money to those at the head of the line who first got the magic money. And who is that? The government and the banks.  Unfortunately, the volume control on the magic money machine has been cranked up to full blast and the machine is cranking out Trillions of dollars… more than has ever been dreamed of before.  And the day the piper will be paid is rapidly approaching. 

Typically, it takes about two years for people to realize that the money isn’t real but simply “magic money”.  We are currently about one year into that two year grace period, and the smart money is buying up hard assets like gold, knowing that it isn’t paper and is the only form of money that isn’t simultaneously someone else’s liability. And unlike magic money, it can’t be created out of thin air.  

At InflationData.com, we constantly monitor the inflation situation and aren’t fooled by the current deflationary numbers.  We know it is simply the calm before the storm.  Those Trillions of dollars are like little hurricane seeds beginning to swirl off the coast, gaining speed and force until they mature into the monetary equivalent of Hurricane Katrina.  If you’d like to keep tabs on the progress of this monetary hurricane, you can join our list of inflation watchers and we will keep you up to date on what is happening in the inflation arena.

For more information on how the bailout might actually cause Hyperinflation see the article Why the Bailout Will Result in Hyperinflation.

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